EU may force bailout on Ireland

European finance ministers started work on possible aid for Ireland’s debt-laden banks, stopping short of an immediate bailout package and risking a setback in bond markets.

Finance chiefs from the 16-country euro zone lauded Ireland’s budget cuts, echoing the rhetorical support offered during the early stages of Greece’s debt trauma before a rescue became necessary.

Ireland said it would not plead for money when International Monetary Fund and European officials arrive in Dublin today to begin probing the banking system’s needs.

“If banking problems are too big for this small country to manage, Europe has made it clear they’ll help," Irish Finance Minister Brian Lenihan told state broadcaster RTE last night before European finance ministers wrapped up their meetings in Brussels.

As Europe struggled to present a united front, Britain said it would back support for Ireland, abandoning a hands-off policy toward the euro region to prevent Irish bank woes from contaminating the closely connected UK market.

But Austria threatened to block its share of the next transfer of aid funds to Greece unless the government met deficit-cutting goals agreed upon six months ago with the EU and IMF.

Austrian Finance Minister Josef Proell said he lacked assurances from Greece to commit to the transfer. He toned down his remarks later, saying Austria was ready to meet its pledge and Greece was “on a good path".

Austria Press Agency quoted him as saying EU finance ministers had agreed to delay the next aid tranche for Greece until January.

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And Spain’s borrowing costs were set to rise at an auction of as much as €4 billion ($5.4 billion) of bonds as the squabbling with Ireland over emergency aid threatened to infect neighbouring countries.

In a potential blow to Ireland, LCH Clearnet raised the margin requirement for Irish bond trading to 30 per cent of net positions, making Irish securities more expensive.

Irish bonds slipped for a second day, pushing the 10-year yield up 0.04 of a percentage point to 8.50 per cent. The extra yield over German bonds rose 0.02 of a percentage point to 5.64 per cent. The spread, a measure of the risk of investing in Ireland, peaked at 6.46 per cent last week.

The talks in Dublin would “see if the state is able to cover the needs of the banking sector", Belgian Finance Minister Didier Reynders said.

“If that’s not the case, there will probably have to be a European intervention," he added.

Such a package could come together quickly. “Is it six months or a few days away? I’d say it’s closer to days," French Finance Minister Christine Lagarde said.

Ministers refused to speculate on Ireland’s needs, reckoned by Barclays Capital at about €80 billion. Klaus Regling, manager of the rescue facility, said the EU could raise the money in five to eight working days.

Britain, which didn’t contribute to the €860 billion in loans and pledges in the wake of the Greek crisis, “stands ready to support Ireland", Chancellor
George Osborne
said.

Ireland’s five-member ISEQ Financial Index of banking stocks is now worth 2 per cent of the peak valuation reached in February 2007. Officials put the cost of cleaning up the banking system as high as €50 billion, equal to about a third of Ireland’s economic output.

To boost confidence, Mr Lenihan may release the 2011 budget before December 7, as originally planned.